On December 29, 2015, Kolek Company granted 100,000 stock options to a group of
ID: 2575711 • Letter: O
Question
On December 29, 2015, Kolek Company granted 100,000 stock options to a group of 100 employees, enabling each employee to buy 1,000 shares for $20 per share. On the grant date, the shares had a market value of $16 per share and the options had a market value of $3.00 per option. The options vest over a 3-year period and become exercisable on January 1, 2019. Kolek Company expects that, based on historical turnover, they will lose approximately 3 of the employees receiving the options per year during the vesting period. Compensation expense will be recognized uniformly over the vesting period.
Assuming all 100,000 options are exercised, what will be the net increase or decrease in stockholders’ equity as a result of the granting and exercising of the options.
a. A decrease of $300,000
b. An increase of $2,000,000
c. An increase of $1,700,000
d. An increase of $2,300,000
Explanation / Answer
The Accounting treatment discussed above can be illustrated by the following numerical example.
Options granted – 100000 on 29/12/2015 at Rs. 20
Vesting Period – 3 years.
Fair Value of options: Rs. 3
Fair Value per share: Rs.16
Hence, Total Employee Compensation Expense each year = $100,000[ (100000×3)/3years]
The accounting entries would be as follows:
Employee Compensation Expense A/C Dr $100,000
To Employee Stock Options Outstanding A/C Cr $100,000
(This entry to be made every year till the vesting period expires)
And in the year of exercising the option, the entry would be:
Bank A/C Dr. (Amount actually received) i.e 100000×$20= $2,000,000
Employee Stock Options Outstanding A/C Dr. $300,000
To Equity Share Capital A/C } $2,300,000
To Security Premium A/C (if any) }
There would be a net increase of $2,300,000 in stock holders' equity.
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